Question 1

An error that overstates the ending inventory will also cause net income for the period to be overstated.

Accepted Answer

This is true because an overstatement of ending inventory will result in a lower cost of goods sold and therefore a higher net income.

Question 2

If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

Accepted Answer

True

Question 3

The more inventory a company has in stock, the greater the company's profit.

Accepted Answer

The statement is false. Having too much inventory can lead to increased storage and maintenance costs, and the risk of products becoming obsolete or spoiled. Additionally, excess inventory ties up a company's cash, making it harder to invest in other areas of the business. Balancing inventory levels with customer demand is important for optimizing profits.

Question 4

Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Accepted Answer

Management can choose any inventory costing method (e.g., FIFO, LIFO, average cost) for financial reporting purposes, but the choice does not need to match the physical movement of goods. The decision is often based on financial, tax, or operational considerations.

Question 5

Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Accepted Answer

LIFO (Last In, First Out) inventory valuation method primarily affects the cost of goods sold and inventory valuation on the balance sheet, rather than directly creating paper or phantom profits. It can lead to higher cost of goods sold during inflationary periods, potentially lowering reported profits, not inflating them with phantom profits.

Question 6

Under the lower-of-cost-or-net realizable value basis, net realizable value is the net amount that a company expects to receive from the sale of inventory.

Accepted Answer

This statement is true. Net realizable value is the estimated selling price of inventory minus the estimated costs of completion, disposal, and transportation. Under the lower-of-cost-or-net realizable value basis, inventory is valued at the lower of its cost or net realizable value.

Question 7

A company may use more than one inventory costing method concurrently.

Accepted Answer

A company can use different inventory costing methods for different types of inventory or for different purposes. For example, it may use first-in, first-out (FIFO) for raw materials and last-in, first-out (LIFO) for finished goods. Alternatively, it may use weighted average for overall inventory valuation and specific identification for high-value or unique items.

Question 8

The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Accepted Answer

The specific identification method involves identifying and tracking the cost of each item sold, rather than using an average cost. This requires following the actual physical flow of goods and assigning the specific cost to each item.

Question 9

If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Accepted Answer

A change in inventory valuation method can have a significant impact on net income. If a company changes its inventory valuation method, it must disclose the effect of the change on net income in its financial statements to provide transparency to stakeholders.

Question 10

Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.

Accepted Answer

Transactions that increase or decrease inventories will affect the balance sheet by changing the amount of assets on hand. Additionally, these transactions will also affect the cost of goods sold and gross profit on the income statement.

Question 11

Goods out on consignment should be included in the inventory of the consignor.

Accepted Answer

Goods out on consignment remain the property of the consignor until they are sold by the consignee, hence they should be included in the inventory of the consignor.

Question 12

Accountants believe that the write down from cost to net realizable value should not be made in the period in which the price decline occurs.

Accepted Answer

Accountants believe that the write down from cost to net realizable value should be made in the period in which the price decline occurs, in order to provide accurate and timely financial information to stakeholders. Delaying the write down could result in overstated inventory values and misleading financial statements.

Question 13

Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.

Accepted Answer

Raw materials inventories are the materials that a manufacturer has on hand and has not yet used in production. They have not yet been completed or made into finished goods ready for sale.

Question 14

The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

Accepted Answer

The FIFO method assumes that the oldest items purchased or manufactured are sold first, leaving the most recently acquired items in inventory, thus valuing the ending inventory at the most recent costs.

Question 15

Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.

Accepted Answer

Goods that have been purchased FOB destination belong to the buyer once they reach the destination. Hence, they should be excluded from a physical count of goods as they are not owned by the seller anymore. However, if the goods are in transit but purchased FOB shipping point, they should be included in a physical count of goods as they are still owned by the seller until they reach the destination.

Question 16

If inventories are valued using the LIFO cost flow assumption, they should not be classified as a current asset on the balance sheet.

Accepted Answer

Inventories valued using LIFO cost flow assumption should still be classified as a current asset on the balance sheet.

Question 17

The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

Accepted Answer

The specific identification method of inventory valuation is more appropriate for companies that sell unique or high-value items, where tracking the cost of each individual item is necessary. For companies that sell a large number of low-unit cost items, other methods such as FIFO or LIFO are more commonly used.

Question 18

If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

Accepted Answer

This is because LIFO (last-in, first-out) assumes that the most recent items purchased are sold first, so the cost of goods sold reflects the higher unit prices of the more recent inventory purchases. As a result, LIFO will show a lower cost of goods sold and higher ending inventory, which leads to a lower gross profit compared to FIFO (first-in, first-out) during a period of rising unit prices.

Question 19

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Accepted Answer

Since there is no beginning inventory, the only inventory being considered is the one purchased during the year. Therefore, under both LIFO and average cost flow assumptions, the cost of this inventory will be the same, resulting in the same value assigned to the ending inventory.

Question 20

The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

Accepted Answer

The expense recognition principle (or matching principle) requires that expenses be matched with the revenues they help to generate, not against the ending merchandise inventory. The cost of goods sold is matched against revenues to determine gross profit, not income determination by matching with ending inventory.

Quiz 6: Inventories Periodic Approach